- The Washington Times - Sunday, May 20, 2007

On May 9, there was an unusual joint hearing in the House of Representatives by the trade subcommittees of the Ways and Means, Financial Services and Energy and Commerce committees. With their new chairmen, the Democrats had a chance to move beyond their criticism of Bush administration trade policy and propose action. The topic was “currency manipulation and its effects on U.S. business and workers.” China was the main focus.

The next day, Democratic leaders and the White House announced their new bipartisan approach. Core international labor and environmental standards would be added to trade agreements, along with quicker access to generic drugs for developing countries. That’s it? However idealistic, these measures do nothing to advance the interests of U.S. business and workers, and will not alter the trade flows that generated a deficit of $763 billion last year. They are geared to bettering conditions overseas, not here at home.

The Bush-Democrat pact applies to deals with Peru, Panama, Colombia and South Korea, not with China. But they indicate a very confused approach to America’s trade problems that will weaken the U.S. posture as it pursues cases against Beijing at the World Trade Organization over illegal subsidies and the theft of intellectual property. Indeed, some Democrats have placed a high priority on undermining intellectual property (drug patents) in trade.

There was more confusion at the House hearings. The Chinese RMB is undervalued by as much as 54 percent, according to the Congressional Research Service. It is one of the tactics used by Beijing to amass a $232.5 billion trade surplus with the U.S. in 2006. Chinese trade continues to be extremely lop-sided, with exports to America running 5-1 over imports. But little was heard beyond complaints and excuses from either committee members or witnesses.

Congress has mandated that the Treasury report on foreign governments that set exchange rates to gain an “unfair competitive advantage,” but the Bush administration refuses to find Beijing at fault. At the hearing, Treasury Deputy Assistant Secretary Mark Sobel made the astounding argument, that “the ‘intent’ of the country in question is a consideration. … Determining intent behind the policy can be difficult to assess.” How can it be difficult to assess that Beijing is intent on using every tactic known to international commercial competition to grab the largest share of world markets? Can anyone be so naive as to think otherwise?

C. Fred Bergsten, director of the Peterson Institute of International Economics, testified that, “A substantial increase in the value of the Chinese currency is an essential component of reducing the imbalances. … However, China has blocked any significant rise in the RMB by intervening massively in the foreign exchange markets, buying $15 billion to $20 billion per month for several years to hold its currency down. … China is thus overtly exporting unemployment to other countries.” But he offered no way to compel Beijing to change its policies.

Instead, he wanted the U.S. to risk another recession to reduce imports by cutting aggregate demand. “The United States should take the lead in addressing the imbalances by developing a credible program to convert its present, and especially foreseeable, budget deficits into modest surpluses like those that were achieved in 1998-2001. Such a shift, of perhaps 3 percent to 4 percent of our GDP, would reduce the excess of our domestic spending relative to domestic output and the shortfall of our domestic savings relative to domestic investment. Fiscal tightening is the only available policy instrument that will produce such adjustments.”

Talk about letting the tail wag the dog. Proper policy should focus on fixing trade to protect the larger economy from harm. Domestic production should increase to meet demand. Mr. Bergsten’s macroeconomic “do without” approach avoids dealing with trade (or China) directly. It is also old thinking, tied to the “twin deficits” notion popular in the 1980s. Yet, during the budget surplus period Mr. Bergsten cites, the U.S. trade deficit increased by more than $200 billion (48 percent) even as the country slid into a mild recession. Trade has to be dealt with on its own terms if the imbalance is to be corrected.

Donald Evans, the former commerce secretary, tried to let Beijing off the hook. He testified that “an immediate shift to a market determined yuan is not possible given the underdeveloped state of China’s capital markets.” Yet, Beijing sets the value of the RMB by fiat. It devalued in 1994 to gain an edge on trade rivals, an act that helped set off the 1997 world financial crisis.

The proper aim of U.S. policy is not to get Beijing to adopt a freely floating exchange rate, as that is beyond reach. The aim is to get Beijing to revalue the RBM to eliminate its unfair trade advantage. It can do so, again, by fiat. If Beijing is unwilling to do so, the United States should impose countervailing duties on Chinese exports to offset the advantage. That is the kind of trade remedy Congress should be debating.

William R. Hawkins is senior fellow for national security studies at the U.S. Business and Industry Council.

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